A fixed interest security was issued on 1 January in a given year. The security pays half-yearly coupons of 4% per annum. The security is redeemable at 110 % 20 years after issue. An investor whopays both income tax and capital gains tax at a rate of 25% buys the security on the date of issue. Income tax is paid on coupons at the end of the calendar year in which the coupon is received.Capital gains tax is paid immediately on sale or redemption. (i) Calculate the price paid by the investor to give a net rate of return of 6% per annum effective. (ii) Calculate the duration of the netpayments from the fixed interest security for an investor who pays income tax as described above but who does not pay capital gains tax, at a rate of interest of 6% per annum effective.

calculate the present value of the coupons and the redemption value, and then we'll use the formula…

year. The security pays half-yearly coupons of 4% per annum. The security is redeemable at 11 buys the security on the date of issue. Income tax is paid on coupons at the end of the calenda n. (i) Calculate the price paid by the investor to give a net rate of return of 6% per annum effectiv ho pays income tax as described above but who does not pay capital gains tax, at a rate of intere

year. The security pays half-yearly coupons of 4% per annum. The security is redeemable at 11 buys the security on the date of issue. Income tax is paid on coupons at the end of the calenda n. (i) Calculate the price paid by the investor to give a net rate of return of 6% per annum effectiv ho pays income tax as described above but who does not pay capital gains tax, at a rate of intere

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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For the case in Example 11. 7, suppose that Capstone decided to finance the remaining $22 million by securing a term loan and issuing 20-year $1,000 par bonds under the following conditions: Interest Source Amount Fraction Rate Term loan $6.6 million 0.30 12.16% per year Bonds $15.4 million 0.70 10.74% per yearCapstone's marginal tax rate is 40%, which is expected to remain constant in the future. Determine the after-tax cost of debt.
Suppose that a party wanted to enter an FRA that expires in 121 days and is based on 55-day LIBOR. The dealer quotes a rate of 0.049 on the FRA. Assume that at expiration, the 55-day LIBOR is 0.029, and the notional amount is USD10,000,000. What is the payoff of the FRA short position?
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An investor requires a 3% increase in purchasing power in order to induce her to lend. She expects inflation to be 2% next year. The nominal rate she much charge is about A. 2% B. 7% C. 3% D. 5%
An lowa state savings bond can be converted to $100 at maturity 9 years from purchase. If the state bonds are to be competitive with U.S. savings bonds, which pay 7% annual interest (compounded annually), at what price must the state sell its bonds? Assume no cash payments on savings bonds prior to redemption. 3.
Currently, a three-year Treasury note pays 10.0%. Assuming that your tax rate is 15%, what is the minimum interest rate that you would you need to earn on a tax-free municipal bond in order to buy it instead? Select one: O a. 8.5% O b. 10.0% O c. 11.0% O d. 9.0%
6. An investor borrows a principal of £1,000,000 and agrees to an interest-only repayment at a rate of 5% p.a., in equal quarterly installments, paid in arrears for 10 years. After 10 years the principal is paid back with a lump payment. The investor uses part of the principal to buy £200,000 nominal of 10-year government bonds, paying semi-annual coupons at a rate of 4% p.a. and producing a yield of 3.5% p.a. effective. Bonds are redeemed at par after 10 years. The remaining portion of the principal (denoted by P) is used to purchase properties that produce annual rental income at a rate of 4% of their initial value P for the first 5 years and, subsequently, at a rate of 5% of their initial value P. Rent is payable monthly in advance. (a) Evaluate the present value at time zero of the total liability. Let ir = 4% p.a. be the annual effective rate applied to liabilities. (b) invested in bonds and deduce the investment in properties P. Compute the present value at time zero of the…
Your liabilities consist of $60,000 coming due in one year and $40,000 coming due in three years. The market interest rate is 7%. What is the convexity of your liabilities? O4.144 O 4,244 3.944 O4.344
Zee Ltd has a 3 million dollar floating rate loan which is re-set every six months. The company wants to protect itself against a rising interest rate in the next six months. It purchases a 3% 6 v/s 12 Forward Rate Agreement ( FRA ) on a notional amount of 3 million dollar. At the start date of the FRA, the market interest rate on floating rate debt is 3.5 % per annum. (i) Calculate the interest payable by Zee Ltd to the providers of finance at the end of month 12. (ii) Calculate the actual interest cost of the loan and justify your answer.
You took out a $200,000 mortgage for 30 years. The contract rate is tied to the one-year U.S. treasury rate (index rate). The fixed risk premium for your mortgage is 9%. Your interest rate will be adjusted every year. For the first year, the index rate is 1.5%. What is the outstanding principal at the end of year 1? $95,758 $198,999 $197,769 $96,726
Albert purchased a bond with exactly 20 years to redemption. The bond pays annual coupons, in arrears, of 5% per annum and is redeemed at par. Albert, who is not liable to pay tax, will obtain a gross redemption yield of 6% per annum if he holds the bond utill redemption. (a) Calculate the purchase price Albert paid for the bond, per $100 nominal if his intention was to hold the bond utill redemption. (b) After exactly ten years, immediately after receiving payment of the coupon then due, Albert sells the bond to Vicky who is liable to pay income tax and capital gains tax at a rate of 30%. The bond is purchased by Vicky to provide a net rate of return of 6.5% per annum. (i) Calculate the price Vicky paid for the bond, per $100 nominal. (ii) Using trial-and-error followed by linear interpolation, calculate the annual effective rate of return, correct to 4 decimal places, earned by Albert during the period for which he held the bond.
An investor who requires a 7% rate of return should be willing to pay $934.58 now to receive $1,000 at the end of one year. True False

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